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Monthly Archives: March 2013

In the flurry of amendments to last week’s budget bill, the Senate voted by the remarkable tally of 99-0 for a “Too Big to Fail” proposal sponsored by the bipartisan trio of Sherrod Brown (D-Ohio), Bob Corker (R-Tenn.), and David Vitter (R-La.). Their amendment calls for steps to analyze and end the huge public subsidy that benefits the six largest banks – those with $500 billion or more in assets. Although the amendment is nonbinding, its overwhelming approval suggests growing support for action to end the era of taxpayer-subsidized megabanks.

Recent studies have put the ongoing funding subsidy to TBTF banks at $80-$100 billion a year. According to a Bloomberg analysis, JPMorgan, Bank of America, Citi, Wells Fargo, and Goldman Sachs account for $64 billion of total subsidy – “an amount roughly equal to their annual profits,” as Bloomberg points out. See AFR statement of support for Vitter-Brown-Corker.

“We’ve seen how too-big-to-fail is also too big to manage, too big to regulate, and too big to jail,” Senator Brown said in a statement issued before last week’s vote.

“This is a really impressive sign that we mean business on ending too-big-to-fail,” Senator Vitter declared afterward.

Vitter and Brown are working on the next step: legislation to require the megabanks to downsize, or face significantly higher capital and other requirements.

Shareholders of the global megabanks JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley have just been silenced. Previously, the shareholders attempted to exert their longstanding ability to present proposals to be voted on at the banks’ annual shareholder meetings, in accordance with Section 14(a) of the Securities Exchange Act of 1934. But late last night, the Securities and Exchange Commission (SEC) updated its website, revealing that the agency had capitulated to those four megabanks’ demands to block the shareholders’ proposals from being voted on.

The shareholder proposals, submitted in late 2012 by the AFL-CIO Reserve Fund, AFSCME Employee Pension Plan, Trillium Asset Management and the Change to Win Investment Group, asked each bank’s board of directors to appoint an independent committee to explore extraordinary transactions that could enhance stockholder value. One potential transaction that each of the shareholder proposals asked the banks to consider was separating the banks’ businesses — in other words, breaking up the banks.

Several commentators, including former FDIC Chair Sheila Bair and banking analyst Mike Mayo, have suggested that our nation’s largest banks do not deliver the kind of value for their shareholders that they would if they were converted into multiple smaller institutions. As Mayo wrote earlier this year, “The largest banks have underperformed not only on returns but also on efficiency, revenue, risk, transparency, reputation and stock price … When we ask, a large majority of investors indicate that breakups — divestitures, downsizings and de-mergers — would be good for stock prices.”

But the banks made a concerted effort to prevent their shareholders from having a spirited debate on the merits of that exact issue. The banks’ “no-action requests” sought assurances from the SEC that it would not recommend enforcement actions against them if they excluded the proposals from their proxy materials. The banks’ requests plainly show that they were willing to make every conceivable argument — and some inconceivable ones — as to why the proposals should not be given up or down votes.

For example, the megabanks argued that the proposals should be excluded because they deal with matters related to each company’s ordinary business operations. That’s right, the banks argued that matters concerning the radical restructuring of their operations would be an “ordinary business decision” and therefore outside shareholders’ purview. JP Morgan Chase made that argument despite the fact that such a restructuring plan would be clearly subject to shareholder approval under the controlling law in Delaware.

The megabanks also argued that the proposals were “so vague and indefinite that shareholders in voting on it would not be able to determine with any reasonable certainty what actions are required.” Perhaps the banks presume their shareholders are fools and won’t understand what the proposals seek to do. More likely, the banks fear that their shareholders would fully understand what the proposals seek to do — and support their passage.

It is alarming that, despite the banks’ imaginative but flimsy arguments, the SEC, without much explanation, sided with the banks, advising each institution in identical language that, “There appears to be some basis for your view that [insert megabank here] may exclude the proposal … as vague and indefinite.” The agency then punted on all of the other arguments that the banks offered, finding it unnecessary to address alternative bases for excluding the proposals from their proxy materials.

Shareholders’ role in reforming corporations — especially megabanks — has garnered increased attention recently. For example, Bair offered this little bit of advice to shareholders last year: “So, shareholders, get ye to the boards that represent you and ask them loudly about whether your company would be worth more in easier-to-understand pieces. The public-policy benefits of smaller, simpler banks are clear. It may be in the enlightened self-interest of shareholders as well.”

The megabanks should welcome the opportunity to explain to their investors why they benefit from their megabank size and structure. And the SEC should permit investors an opportunity to let their voices be heard.

At Tuesday’s confirmation hearing, Massachusetts Senator Elizabeth Warren had no questions for Richard Cordray, the nominee to lead the CFPB. “You’ve already testified 12 times [and] CFPB officials have testified more than 30 times,” she pointed out. “You’ve been an open book… and you’ve won widespread praise for both your balance and your judgment.”

Instead, Warren addressed her questions to the 43 Senators who have pledged to block a confirmation vote:

“What I want to know is why, since the 1800s, have there been agencies all over Washington with a single director including the OCC, but unlike the consumer agency, no one in the U.S. Senate has held up confirmation of their directors, demanding that the agency be redesigned.

“What I want to know is why every banking regulator since the Civil War has been funded outside the Appropriations process, but unlike the consumer agency, no one in the United States Senate has held up confirmation of their directors demanding that that agency or those agencies be redesigned.

“And what I want to know is why there are agencies all over Washington whose rules are final, subject to the ordinary reviews and oversight, while the CFPB is the only agency in government, subject to a veto by other agencies. But unlike the CFPB, no one in the U.S. Senate holds up confirmation of their directors, demanding that those agencies be redesigned.

“From the way I see how other agencies are treated, I see nothing here but a filibuster threat against Director Cordray as an attempt to weaken the consumer agency. I think the delay in getting him confirmed is bad for consumers. It’s bad for small banks. It’s bad for credit unions. It’s bad for anyone trying to offer an honest product in an honest market.

“The American people deserve a Congress that worries less about helping big banks and more about helping regular people who’ve been cheated on mortgages, on credit cards, on student loans, on credit reports. I hope you get confirmed. You have earned it, Director Cordray.”

In a moment of striking candor last week, Attorney General Eric Holder came close to agreeing that major banks have become “too big to jail.”

“I am concerned,” Holder told the Senate Judiciary Committee in answer to a question about the failure to bring criminal charges against HSBC and other banks, “that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them…” Awareness of the potential “negative impact on the national economy, perhaps even the world economy” can have an “inhibiting impact on our ability to bring resolutions that I think would be more appropriate,” he explained.

In other words, the awesome size and power of the biggest banks threatens not only the economy, but also the rule of law. While that is obviously an unacceptable attitude for top officials of the Justice Department – and an attitude they had better rethink – it reinforces the case for downsizing these institutions.

It also reminds us that financial regulation cannot be effectively reformed until we address the question of bank scale and complexity. If the government balks at the idea of punishing a bank implicated, as HSBC was, in money-laundering for drug lords and terrorists, it seems certain that banks will not be held accountable for violating technical rules on risk management. In short, no regulations will work as long as the biggest banks can count on more of this soft-gloves treatment.

If the Justice Department is stymied by fear of the economic repercussions, “That’s a very scary, very ugly way to run the country,” Halah Touryalai wrote on Forbes.com. adding: “It’s no wonder then that big banks hate the idea of breaking up.”

For decades, consumer groups have been saying that credit reports are riddled with errors. A new Federal Trade Commission survey confirms that assessment and underscores the need for a strong Consumer Financial Protection Bureau to help reform the credit reporting industry.The study, featured on the Feb. 10 edition of 60 Minutes and formally released on Feb, 11, found that 21% of consumers had verified errors in their credit reports, 13% had errors that affected their credit scores, and 5% had errors serious enough to cause them to be denied or pay extra for credit. FTC Chairman Jon Leibowitz told 60 Minutes that the study provided “pretty troubling information.””The FTC’s findings are no surprise,” said Ed Mierzwinski, Consumer Program Director of the U.S. Public Interest Research Group (U.S. PIRG). “We’ve criticized the credit reporting industry for decades over unacceptable levels of seriously damaging mistakes, many of which are entirely preventable.” The FTC study, as Mierzwinski noted, found that the percentage of serious errors was about 10 times the figure reported by a May 2011 industry-funded study, which had claimed that only 0.51% of credit reports contained mistakes serious enough to have an adverse effect on consumers.

“It’s unconscionable that 40 million American have errors in their credit reports, and that 10 million have errors grave enough to cause them to be denied or charged more for credit or insurance or even be denied a job,” noted Chi Chi Wu, staff attorney at the National Consumer Law Center (NCLC). “There needs to be serious and wholesale reform of the credit reporting industry.”

Although the FTC study was mandated by Congress in the Fair and Accurate Credit Transactions Act of 2003, the power to do something about the problem rests largely with the Consumer Financial Protection Bureau. For that reason, the study reinforces the importance of Senate action to confirm a full-time CFPB director, eliminating any uncertainty over the agency’s supervisory authority. “These findings of widespread and damaging errors in credit reports underscore once again how important the Consumer Bureau is, and how important it is for the Senate to confirm Richard Cordray as Director, so it can get on with the business of making credit markets fairer and safer,” AFR Executive Director Lisa Donner said.

The Dodd-Frank Act, which created the CFPB, recognized the need for heightened oversight of credit bureaus, and gave the CFPB rule-writing, supervisory, and enforcement authority well beyond any that the FTC had possessed in relation to credit reports. But the Senate’s failure to confirm CFPB director Richard Cordray (who was given a recess appointment last year) to a full-term creates a degree of uncertainty about its authority. Recently, 43 Republican Senators sent the President a letter saying that they would block Cordray’s (or anyone else’s) nomination unless and until the bureau is seriously weakened.

This week, the HR Policy Association’s so-called “Center on Executive Compensation” criticized a member of the Securities and Exchange Commission (SEC) for suggesting companies should consider voluntarily disclosing CEO-to-worker pay ratios. The HR Policy Association represents human resource executives of more than 325 of the largest U.S. corporations, and would prefer to keep secret the pay disparity between their bosses—the CEOs—and their employees.

CEO-to-worker pay ratios must be disclosed under a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. But, thanks in part to lobbying by corporate groups such as the HR Policy Association, this provision of the Dodd-Frank Act has not gone into effect yet. The SEC has not yet issued the pay ratio disclosure rule despite receiving more than 20,000 letters favoring the rule from investors and the public.

Corporate groups have claimed they don’t know how much their median employee makes, and that this information is not of interest to investors or the public. The AFL-CIO has rebutted these concerns, pointing out that CEO-to-worker pay ratios have a material impact on employee morale, productivity and turnover. Moreover, companies can use statistical sampling to determine how much their median employee earns.

On Feb. 20, SEC Commissioner Luis Aguilar suggested that companies voluntarily provide investors with this information. “Moreover, risks relating to compensation go beyond the immediate incentives of a particular compensation plan or policy. The relative pay of different classes of employees, such as the ratio between CEO compensation and median pay, can also create risks to an enterprise, including the risk of employee, customer and shareholder discontent,” he said.

This was too much for the defenders of CEO pay at the Center on Executive Compensation. In a Feb. 21 letter to Aguilar, the center asked him to retract his recent speech calling for companies to voluntarily disclose the ratio “due to the confusion it would likely generate.” The center’s letter says “the calculation of the median compensation of all employees…is unjustifiably complex.”

Given the center’s desperation to squash any disclosure of CEO-to-worker pay ratios, perhaps the HR Policy Association’s front group should change its name to the “Center for Executive Compensation.” To learn more about CEO-to-worker pay ratios and why the center is wrong, visit the AFL-CIO’s Executive Paywatch website.

Jessica Silver-Greenberg (New York Times, 2/24) looks at the ties between the big banks and online payday lenders. Some of these institutions have entered the payday lending business in their own right. But, beyond that, the likes of JPMorgan Chase, Bank of America, and Wells Fargo have become, as Silver-Greenberg puts it, a “critical link… enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely” and sometimes allowing “lenders to tap checking accounts even after the customers have begged them to stop the withdrawals.”

For the banks, it can be a lucrative partnership. “many customers are already on shaky financial footing,” Silver-Greenberg explains, payday loan withdrawals “often set off a cascade of fees.”

The Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and authorities in New York and Arkansas, among other states, are said to be investigating the role of major banks in the rise of online payday lending. Senator Jeff Merkley (D-Ore.) has introduced legislation that would require such lenders “to abide by the laws of the state where the borrower lives, rather than where the lender is” while allowing borrowers to cancel automatic withdrawals more easily.

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This blog is maintained by AFR as a forum for ongoing news and commentary about the fight for effective financial reform. Blog posts represent the opinions of their authors / posters, and do not necessarily represent the views of the AFR coalition or coalition members.